Continued favorable development of reserves for prior accident years may offer a partial offset to the likely elevated level of underwriting losses the U.S. property and casualty industry will incur from the current catastrophe-riddled calendar year.
Although some industry participants have speculated for several years that favorable prior-year development will eventually taper off, statutory data for the first half of 2017 show little sign of a deceleration. In fact, in the absence of a repeat of the sort of material adverse development that American International Group Inc. reported in the fourth quarters of each of the past two years, the P&C industry looks set to generate its highest level of favorable development since 2014 or, potentially, 2013.
According to an aggregation of disclosures on Part 3 of quarterly statements, P&C insurers produced favorable development of loss and loss-adjustment-expense, or LAE, reserves for all prior accident years totaling $7.16 billion during the first half of 2017. Approximately $1.54 billion of the favorable development hit the books during the second quarter. The amounts of favorable development in the comparable periods of 2016 were $6.99 billion and $1.67 billion, respectively.
Bond insurers represented one of the key sources of unfavorable year-over-year comparison in the second quarter as the industry addressed certain Puerto Rico exposures. MBIA Inc.'s National Public Finance Guarantee Corp. produced the industry's highest amount of adverse development among individual U.S. P&C entities in the second quarter at nearly $219 million. At the group level, MBIA and Assured Guaranty Ltd. ranked second and third behind AIG with unfavorable development among their U.S. P&C units of 229 million and $87 million, respectively.
The P&C industry's favorable development for the first half and second quarter of 2017, when excluding MBIA, Assured Guaranty and four other bond insurers, totaled $7.89 billion and $1.94 billion, respectively, compared with $7.06 billion and $1.68 billion as similarly adjusted in the prior-year periods.
The majority of the prior-year development in the first half and second quarter of 2017 pertained to accident year 2016. That year's relative share of the result depends on whether the six bond insurance groups are included, however, as most of their adverse development came from older accident years.
While only AIG and MBIA had unfavorable development of $100 million or more in the second quarter across all prior accident years, a total of five P&C groups or top-tier entities posted $100 million or more in favorable development, led by the $472.1 million attributable to the U.S. P&C units of Berkshire Hathaway Inc. The groups led by State Farm Mutual Automobile Insurance Co. and United Services Automobile Association along with Travelers Cos. Inc. and Oregon workers' compensation insurer SAIF Corp. also had in excess of $100 million in favorable development. National Indemnity Co., which accounted for $167.8 million of Berkshire Hathaway's second-quarter favorable development, attributed its reserve releases to GEICO Corp. cessions.
When backing the favorable prior-year development out of the losses and LAE incurred by P&C companies during the first half and second quarter, S&P Global Market Intelligence estimates that the reserve releases effectively reduced the industry's combined ratio by 2.7 and 1.1 percentage points, respectively, compared with 2.7 points and 1.3 points in the respective periods in 2016.
After eliminating results attributable to the six bond insurance groups and entities under coverage as state funds and residual markets, the benefits to the combined ratios for the first half and second quarter of 2017 totaled 2.9 and 1.3 percentage points, respectively, up from 2.7 and 1.1 points in the year-earlier periods. In all the scenarios, however, the industry's combined ratio remained above 100% for the first half and second quarter of 2017.
Although the amount of favorable development the industry generated during the first half of 2017 lagged 2015's run-rate by a significant margin on a total-filed basis, the full-year results for 2015 and 2016 were dramatically impacted by AIG's reserve building. AIG's P&C units recorded loss and defense-and-cost-containment-expense development as reported on Schedule P of annual statements of $3.41 billion in 2015 and $4.36 billion in 2016. The industry's prior-year development would have increased to $10.69 billion in 2015 from $9.88 billion in 2014, then slipped to $8.82 billion in 2016, in the absence of AIG's actions.
The coming months will determine whether the favorable development continues unabated or if the mounting catastrophe losses provide an opportunity for companies to top off their reserves in what will undoubtedly prove to be a challenging year.